Penalties u/ss 271D and 271E quashed for internal fund adjustments, provisions held directory with reasonable cause

ITAT set aside penalties imposed under ss. 271D and 271E for alleged contravention of ss. 269SS and 269T. It held that the validity of penalty must be tested with reference to the law in force when the impugned cash transactions occurred, and that the provisions are directory, not mandatory. The fund movements between the assessee and its sister concerns were treated as internal business adjustments, not "loans" or "deposits" in the statutory sense, as there were no receipts, promissory notes or independent evidence of borrowing. Alternatively, even assuming applicability of ss. 269SS/269T, the assessee's bona fide belief and genuine transactions constituted reasonable cause, rendering penalty unsustainable.

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Issues involved:
1. Levy of penalty u/s 271D for violation of section 269SS.
2. Levy of penalty u/s 271E for violation of section 269T.
3. Applicability of penal provisions retrospectively.
4. Constitutionality of sections 269SS and 269T.
5. Nature of transactions between sister concerns.

Summary:

1. Levy of penalty u/s 271D for violation of section 269SS:
The appellant, a registered firm engaged in money-lending, was penalized u/s 271D for accepting cash deposits/loans of Rs. 57,95,000 in violation of section 269SS. The appellant contended that these were transfers between sister concerns, not loans or deposits, and were accounted for without any concealment. The CIT (Appeals) partially accepted this, reducing the penalty to Rs. 29,95,000.

2. Levy of penalty u/s 271E for violation of section 269T:
Similarly, the appellant was penalized u/s 271E for repaying deposits of Rs. 58,50,000 in cash, violating section 269T. The CIT (Appeals) reduced this penalty to Rs. 23,90,000. The appellant argued that these were intra-group fund transfers, not deposits, and thus outside the scope of section 269T.

3. Applicability of penal provisions retrospectively:
The Tribunal held that sections 271D and 271E, effective from 1-4-1989, could not apply retrospectively to transactions before this date. It cited CBDT Circulars clarifying that these provisions apply to transactions after 1-4-1989. The Tribunal rejected the revenue's argument that these provisions should apply to the assessment year 1989-90, as the transactions occurred in the previous year ending 31-3-1989.

4. Constitutionality of sections 269SS and 269T:
The appellant argued that section 269SS was declared ultra vires by the Madras High Court in Kumari A.B. Shanthi, and hence section 269T should also be considered ultra vires. The Tribunal, favoring the taxpayer, followed the Madras High Court's decision, despite conflicting decisions, and held the penalties u/s 271D and 271E void ab initio.

5. Nature of transactions between sister concerns:
The Tribunal examined whether the transactions between the appellant and its sister concerns constituted "deposits" or "loans." It concluded that these were fund transfers within a group managed by the same individuals, without the characteristics of formal loans or deposits. The transactions were genuine and not aimed at tax evasion. Thus, sections 269SS and 269T were not applicable. Even if applicable, the appellant's bona fide belief and genuine nature of transactions provided reasonable cause to cancel the penalties.

Conclusion:
The Tribunal allowed the appeals, canceling the penalties u/s 271D and 271E, holding that the transactions did not attract the provisions of sections 269SS and 269T, and even if they did, there was reasonable cause for the appellant's actions.

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